Actively managed exchange traded funds have been slow to match the phenomenal growth in passive index-based ETFs, but the active space has produced some interesting investment strategies.
Active bond ETFs have gotten a lot of attention lately, mostly due to PIMCO's entrance into the space, notably via the PIMCO Total Return ETF (NYSEARCA:BOND) and the PIMCO Enhanced Short Maturity ETF (NYSEARCA:MINT).
But there are some other popular active ETF strategies as well, including the WisdomTree Emerging Markets Local Debt Fund (NYSEARCA:ELD), which provides attractive yields from emerging market debt securities. The ETF has a 5.15% 30-day SEC yield. ELD was the first active ETF to break the $1 billion in assets under management mark.
Investors can also capitalize on a down market with the AdvisorShares Ranger Equity Bear ETF (NYSEARCA:HDGE). Components are selected based on income statement, cash flow statement and balance sheets in an attempt to weed out companies with low earnings or suspect accounting practices, along with other qualitative analysis.
There are 62 actively managed U.S.-listed ETFs with $14.3 billion in assets under management. To put this in perspective, there are 1,500 U.S.-listed ETFs with $1.56 trillion in assets, according to XTF data.
Robert Goldsborough, an ETF analyst for Morningstar, believes active ETFs will gain greater acceptance from fund providers and their clients.
"We're going to see more major, noted managers moving into actively managed ETFs," Goldsborough said in a New York Times article. "More investors and advisers are comfortable with ETFs, investors believe in active management, and the ETF structure has a lot of benefits."
The ETF structure is starting to attract mutual funds as a way to lower overall costs. Due to the ETF's share creation and redemption mechanism, ETFs typically have lower fees than mutual funds. According to Morningstar, the average active ETF expense ratio is 0.83%, compared to 1.24% for mutual funds. However, passive ETFs are even cheaper, with an average 0.15% expense ratio.
Money managers, though, are loath to reveal their secret sauce through the ETF's requirement for daily transparency.
"Managers have a problem with that," Goldsborough added. "They fear that if they disclose their holdings, there will be front-running and shadowing."
Some companies, though, like T. Rowe Price, Eaton Vance, State Street, Vanguard and BlackRock have proposed non-transparent active ETFs to sidestep the problem.
Max Chen contributed to this article.
Full disclosure: Tom Lydon's clients own TTFS.